Use the information below to answer questions a and b. a) The Harrison originate

Q: Use the information below to answer questions a and b. a) The Harrison originate

Ans: A) Principal & Interest payment to the issuer = ($87891*10%) + $ 87891 = $ 96680

ID: 2516137 • Letter: U

Question

Use the information below to answer questions a and b.

a) The Harrison originated a pool containing 40 ten-year fixed interest rate mortgages with an average balance of $50,000 each. All mortgages in the pool carry a coupon of 10%. (For simplicity, assume that all mortgage payments are made annually at 10% interest.). Assume a constant annual prepayment rate of 10% (for simplicity, assume that prepayments are based on the pool balance at the end of the preceding year and begin at the end of year 1). Below is the pool’s cash flows from years 1 to 9:

Principal

Principal and

End of

Pool

due to

Interest Pmts

Year

Balance

Prepayment

to Issuer

1,674,509

200,000

325,491

1,383,747

167,451

290,763

1,124,372

138,375

259,375

893,419

112,437

230,952

688,284

89,342

205,136

506,716

68,828

181,568

346,862

50,672

159,854

207,384

34,686

139,478

87,891

20,738

119,493

Assume that eight years have passed, and the market interest rates are 9%, what is the price that Harrison could obtain if he wants to sell the pool to FNMA now?

$210,026

$140,231

$236,911

$96,680

b) If Harrison decides to securitize the mortgages by issuing 100 pass-through securities (MPTs) instead of selling the pool of mortgage to FNMA, by the end of year 1, what is total payments to investors who bought the MPTs? Suppose the servicing and guarantee fee is 0.5% (based on pool balance at the end of the previous year) , and the current market rate of return is 9.5%.

$515,491

$505,491

$525,491

$225,491